Lighting up time for Turkish privatisation campaign

By bne IntelliNews October 31, 2007

Bernard Kennedy in Ankara -

Following its re-election in July, the Justice and Development Party (AKP) has stepped up its privatisation drive by inviting fresh bids for an old flame - the Turkish state-owned Tekel cigarette manufacturing business.

Selling off the former tobacco monopoly in a country of 20m unrepentant smokers - the world's seventh largest market - has proved mysteriously difficult. Tekel rose to the top of the privatisation pack in 2003, the year after the AKP came to power. But while the semi-Islamist party was quick to sell off the sister alcoholic drinks business to a group of construction firms for a modest $292,000, a bid from Japanese Tobacco International (JTI) of $1.15bn for the cigarette-maker was rejected as too low. Two years later, a repeat tender failed to attract even a single offer.

Doggedly ignoring suggestions that Tekel's plants and trademarks should be auctioned off in packages, the Privatisation Administration (PA) has reset the clock to January 25 - and is hoping it will be third time lucky.

Smoke signals

The big question is whether the tougher times in their home markets will force the international tobacco giants to compete more heavily to acquire Tekel. And if they don't, will private equity firms - or a local conglomerate or construction company - step in to fill the gap?

Helping the privatisation is that the Turkish economy has grown and stabilised, company valuations are soaring and popular opposition to privatisation has waned. This time round, moreover, it is Tekel's production assets which are on the block, rather than the company itself - a manoeuvre that spares interested parties the disincentive of a complex balance sheet.

The bad news, however, is that Tekel's share of the $12bn-a-year market ($3bn after sales taxes) has declined from almost 50% in 2003 to 33% in the first half of 2007. Despite reorganisation and modernisation of the company's six plants, many of its brands still occupy the lower end of the market, with a high oriental tobacco content.

A bid by Marlboro-maker Philip Morris, which now claims 42% of cigarette sales in Turkey, has been ruled out by the Competition Board. There is no such problem for JTI, which makes Camel and Winston, or British American Tobacco (BAT), which makes Kent and Pall Mall. The non-Chinese world's number three and two are once again Tekel's most likely customers - all the more so as they have struggled to raise their market shares above 10% through organic growth.

Among local hopefuls, the Dogan Group, a leading media-to-energy conglomerate, and Ankara-based Limak, one of the partners in the venture that bought out the alcoholic drinks operation, haven't ruled out a bid. And prominent among potential newcomers to the Turkish market is Korean Tobacco and Ginseng (KT&G), which pulled out of the original tender at a late stage in 2003.

However, Imperial Tobacco, which is currently in the process of acquiring Franco-Spanish Altadis, is tipped to stay on the sidelines.

Estimates of market share are to be treated with caution, especially as smuggled and counterfeit smokes - including northern Iraqi imitations of Tekel's premium brands - are ubiquitous. Would-be buyers must also factor in regulatory issues to their calculations. An imminent tax increase aside, the possibility that the government might yield to pressure from the EU to fully liberalise tobacco and cigarette imports and to alter its sales tax structure, which favours cheaper products, can't be ruled out. A system of tax labels introduced this year to counter smuggling has increased manufacturers' costs as well as falling foul of Brussels.

Tekel one of many in pipe-line

Despite the setbacks in selling off Tekel, privatisation accelerated during the AKP's first term in office. Between 2005 and 2007, the PA concluded $20.5bn worth of transactions - 68% of the historical total. The figure includes $6.55bn committed by Saudi Oger for 55% of Turk Telekom in 2005, $6.91bn put up by local groups for controlling stakes in refiner Tupras and steel mill Erdemir in 2005-06, and $755m paid by PSA of Singapore and partners for Mersin port management rights in 2007. The completion of a $1.28bn deal for Izmir port involving Hutchison Whampoa of Hong Kong is imminent. In addition, mobile phone operator Telsim was sold to Vodafone for $4.55bn by the Savings Deposit Insurance Fund (SDIF), which is realising the assets of failed banks, in 2005-06.

Despite global appetite for Turkish assets possibly diminishing, the State Planning Organisation has pencilled in cash receipts of $11.8bn for 2008, compared with $11.6bn in 2007. The official pipeline still includes easy targets like the National Lottery, the Istanbul Stock Exchange, the toll roads and Bosphorus bridges, more port management rights and at least one municipal gas distribution company, as well as sugar refineries and real estate.

On the slate is the power sector's privatisation, which would be a huge, but potentially lucrative, challenge. The future of the largest state bank, Ziraat Bank, remains to be decided, but control of Halkbank could be on offer within months. In May, an IPO for 25% of the bank's stock raised $1.84bn. A share offer for Turk Telekom is expected in 2008. Tea processing plants, the Post Office and gas and oil companies could also swell the sales list. Look out too for the auction of the country's second largest media group, Sabah-ATV, by the SDIF on December 5.

Still, large privatisations are fraught with difficulty and prone to political interference. The government has yet to finalise the $2bn sale of a 51% stake in the Petkim petrochemicals plant near Izmir to the second-highest bidder, a consortium of Azerbaijani state oil company Socar, Turcas of Turkey and Injaz of Saudi Arabia. A consortium that included Russia's Troika Dialog won the auction in July, but was passed over because of Troika chairman Ruben Vardanyan's links to the international campaign to have Turkish killings of Armenians in 1915 recognised as genocide.

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Lighting up time for Turkish privatisation campaign

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